Weaker regulation, in other words, will let US-based banks gain more global market share relative to European or Japanese competitors. That's great if you happen to be a bank shareholder or a bank executive, or have a yearly bonus pegged to bank share prices. But it has nothing to do with creating job opportunities for the long-term unemployed or increasing middle-class wages.There's no great mystery as to how regulatory policy shaped primarily by the business interests of major banks ends -- big profits, big bonuses, and eventually a big crash and a big bailout. But the genius of bank regulation as a policy area is that no matter how badly you screw it up, the odds are that on any given day, there won't be a financial crisis anyway.A poorly supervised financial system can pile on egregious hidden risks for fun and profit and suffer no obvious bad consequences for years. If it happens to blow up in an election year, of course, you're screwed. But while dramatic moves on immigration, health care, and budget policy are sure to provoke immediate blowback, on bank regulation, it's entirely plausible that Trump will sow the seeds of destruction and nobody will notice until reelection is in the rearview mirror.
Last week, in a story that probably didn't get as much attention as it deserves, Donald Trump issued a new directive to make it easier for your financial advisor to deliberately rip you off. At the same time, the Republican president, who made anti-Wall Street rhetoric a key part of his campaign message, began laying the groundwork to undo elements of the Dodd-Frank reform law.Don't worry, though, because Trump has a perfectly clear rationale for his actions: "I have so many people, friends of mine, that have nice businesses and they can't borrow money. They just can't get any money because the banks just won't let them borrow because of the rules and regulations in Dodd-Frank."In other words, the president is targeting legal safeguards and layers of financial-industry accountability so that his friends can get more money. The comments were certainly candid.But they were also baffling. To the extent that reality matters, commercial lending is actually at record highs right now -- even with Dodd-Frank safeguards in place -- so it's not altogether clear what the president is whining about.At the same White House event, Trump turned to JPMorgan CEO Jamie Dimon and said, "There's nobody better to tell me about Dodd-Frank than Jamie." If you voted for Trump because you thought he'd stand up to Wall Street, I'm afraid you were suckered.But perhaps most alarming of all is the potential impact of this administration's vision as it relates to the finance industry. Vox's Matt Yglesias had a good piece on this yesterday, noting that Trump seems determined to encourage Wall Street to engage in more risky lending.
The irony is, financial regulatory reform -- which is to say, the safeguards Trump is eager to undo -- has been quite effective. The system is more stable; the layers of accountability are preventing unnecessary riskiness; the markets have grown steadily; etc. I've heard compelling arguments that policymakers could make existing rules far stronger, but there's no reason to turn back the clock to a pre-crash framework.Unless, that is, you're a Republican president worried about your "friends" not having enough money.As for the politics, I think much of the talk about Trump facing a backlash because of betrayals of his campaign principles is probably overstated -- his loyalists generally seem unconcerned with the president's inconsistencies -- but I think this is one of the few areas in which Trump and his team really are playing with electoral fire.He swore up and down for months that it was Hillary Clinton who'd do Wall Street's bidding, while Americans could expect his administration to stand up to the finance industry and its lobbyists. Millions of voters actually believed he'd be "tough" on Wall Street.And now Trump is doing the exact opposite, creating serious economic risks, and doing the exact opposite of what many of his ardent supporters hoped for. The potential for serious consequences -- economic and electoral -- are real.